With the S&P Indicator surging above 30, an extreme value is reached which in the past often was associated with increasing distributive activities. July 4th price action in the ES futures market indicates a sharp reversal from the 6300 zone and Seasonality is expected to weaken considerably in the second half of July, causing a probable slow in momentum.
Last week was driven mainly by the release of important figures on the jobs market and the “Big ugly Bill”. As reported, the NFP numbers were good, indication a resilient labour market -if - and only if those numbers will not be revised in the future. Stock markets recently tended to celebrate the release of healthy NFP numbers but ‘forget’ to correct for unhealthy revisions. However, this time a weak labour market could be interpreted as the initiation for a mid- to long-term economic decline in the US: Recession. With the release of good numbers also the FED is not obliged to cut rates soon, e.g. in July. Furthermore, a cutting of the short-term lending rates has only a limited effect on US-treasuries or mortgage-rates, as these are made up “by the market” and are based on investors risk-perception. The assumption that a rate cut by the FED would help US-consumers or the US-government to refinance it’s massive debt, appears to be incorrect, as things are actually more complex.
And talking about debt, the “Big ugly Bill” was passed by the house and confirming that not only debt-refinancing, but also the creation of massively new debt is looming. Generally increasing public debt increases liquidity which will end up somehow in the markets and thus push them further up. Why could this time then be different?
Public debt alone is not a value that matters, but when it is measured against a countries economical power it puts things into perspective. The US can certainly sustain a much larger debt than most countries in the world and way more than Greece, which defaulted over it’s debt in 2009. Greece’s Debt-GDP ratio was 126% by that time, however it is suspected that those numbers are understated. Some estimates refer values of 170 %. Argentina in 2001 hat a Debt-to-GDP-Ratio of 150%, before it defaulted Currently the US hovers at a Debt to GDP of 127%. The “Big ugly Bill” has a volume of approx. 4.5 Billion USD over 10 years, including tax reduction for the wealthy, expenses for infrastructures and defense and various subventions. Here is a breakdown:
✅ Tax Cuts (Approx. $3.3 trillion over 10 years) The largest cost driver in the bill is the extension of key provisions from the 2017 Tax Cuts and Jobs Act (TCJA), including:
Individual tax cuts Lowered individual income tax rates remain in effect. Expanded standard deduction preserved. Child Tax Credit remains higher than pre-2017 levels, though not as generous as under Biden’s pandemic expansions. Small business pass-through deduction (Section 199A): Extended. Allows owners of pass-through businesses (e.g. partnerships, S-corps) to deduct up to 20% of qualified business income.
Estate tax exemption: High exemption levels (currently $13 million per person) would remain, rather than reverting to lower pre-TCJA thresholds. Lower alternative minimum tax thresholds: Maintains higher exemption levels for individuals. Corporate provisions: Not a full corporate tax cut extension, but some business expensing rules (bonus depreciation) are preserved longer than scheduled.
→ Collectively, these measures cost about $3.3 trillion in foregone revenue over 10 years.
✅ Infrastructure Spending ($400–500 billion) Roads, bridges, airports modernization Rural broadband expansion Electric grid upgrades LNG export infrastructure Pipeline modernization Coastal protection and flood prevention projects
✅ Defense Spending ($600–650 billion) Nuclear arsenal modernization (triad: missiles, bombers, submarines) New Navy ships, destroyers, submarines Artillery and hypersonic weapons production ramp-up Troop increases in cyber and space operations Military support for allies, particularly in Eastern Europe and the Indo-Pacific
✅ Subsidies and Industrial Policy ($100–200 billion) Energy tax credits skewed more toward fossil fuels and nuclear rather than renewables Farm subsidies for fertilizer, diesel fuel, and crop insurance Expansion of “Opportunity Zones” tax benefits Funds for onshoring critical pharmaceutical and biotech manufacturing
Projected Impact on Debt-to-GDP The Committee for a Responsible Federal Budget (CRFB) estimates the bill would add $4.5–5 trillion to deficits over the next decade if fully implemented.
This could drive U.S. debt levels over 170% of GDP in the long term, absent offsetting spending cuts or revenue increases. As a consequence, another downgrade for the US could happen, due to 1. Rapidly rising national debt (e.g. driven by massive spending plans like the “Big Beautiful Bill”) 2. Political conflicts over the debt ceiling, with another standoff narrowly avoided in early 2025 3. High interest costs on government debt, putting pressure on the federal budget 4. Lack of a clear, long-term fiscal consolidation strategy to stabilize debt levels
Worth to mention what happened historically to US stocks after a downgrade: 🇺🇸 1. S&P Downgrade – August 5, 2011 Event: S&P downgraded the US from AAA to AA+ for the first time in history.
Immediate Market Reaction:
The S&P 500 index fell sharply in the days after the downgrade. For example: August 8, 2011: S&P 500 dropped 6.7% in one day — one of its worst days since 2008. Volatility spiked dramatically (VIX jumped over 48). Paradoxically, US Treasury yields fell. Investors fled to Treasuries as a safe haven despite the downgrade, driving prices up and yields down. Example: 10-year Treasury yields fell below 2.5% (extremely low for that time). Longer-term: Markets recovered within months. The downgrade did not cause a sustained bear market. US borrowing costs remained low overall.
→ The main market turmoil was driven as much by broader eurozone debt crisis fears as by the US downgrade itself.
🇺🇸 2. Fitch Downgrade – August 1, 2023 Event: Fitch downgraded the US from AAA to AA+. This event is tracked in the historical examples of the S&P Indicator and can be found under RESOURCES
Immediate Market Reaction: The stock market reacted modestly but did not crash. The S&P 500 fell about 1-2% in the days following the announcement. Treasury yields rose slightly as concerns grew about long-term fiscal health, but moves were not extreme.
Longer-term: The downgrade sparked political debates but didn’t cause a major market crisis. Markets continued their general uptrend during the second half of 2023. Investors still viewed Treasuries as a global safe haven.
Key Lessons from Both Downgrades ✅ Stock markets can drop sharply short-term, especially in uncertain political contexts. ✅ Treasuries often rally despite a downgrade, as investors still trust US debt as a safe asset. ✅ Downgrades alone have not triggered prolonged US bear markets. ✅ The broader economic context (e.g. debt ceiling fights, global crises) usually has more impact on markets than the downgrade itself.
In short: Both historical downgrades caused short-term volatility but did not destroy the US stock market. Investors still see the US as a fundamentally strong economy and Treasuries as the global safe asset, despite political drama.